Clinton Arentz from Trilogy Funds sits down with Domenic Lo Surdo of Stamford Capital to talk all things commercial property, construction funding and interest rate rises.
Clinton: [00:00:23] I'm Clinton Arentz, head of lending and property Developments for Trilogy Funds Management. And I'm here today with Domenic Lo Surdo, joint managing director from Stamford Capital. Very much welcome your time here this morning Domenic to talk through the market at large and experience with both heads through our two groups and it'll be interesting to to line those thoughts up because I know we travel in similar circles in terms of our activities in the market. Trilogy is a large scale lender and of course you're one of the leading brokers at a commercial level, introducing high quality development transactions to the lending market. And some of those come to us at Trilogy and we hope you've had a good experience.
Domenic: [00:01:04] Yeah, definitely. It's lovely to be here. Thanks for inviting me along, Clinton.
Clinton: [00:01:08] It's been an interesting year. I guess it's been an interesting couple of years since our friend COVID broke out and the world changed certainly for the construction space. We've seen much change and we saw the COVID lockdowns initially and then ultimately supply chain disruption and tremors through the construction market and price increases and largely now increasing inflation. And of course, the adjusting factor of interest rates on the rise as well, you know, driven by central banks looking to, you know, to balance their model a little bit. So a lot of our developer clients have had to work our way through that from beginning to end. But Trilogy itself has a very proactive management style. We lean into those challenges. We work with those borrowers quite closely. But a lot of that has to do with setting up to succeed in the beginning. And we do take great value in the quality of the the lending submissions and proposals that you bring to the table for us to make an initial consideration around a loan and and understand all of the elements, the strengths, the weaknesses, the challenges that project might have, and go into it with a strong footing. And that helps us help the developers during the course of the project. And that's that's been a good steward for us in terms of keeping our default rates low, success rates high repayments very strong. And I'm sure you've experienced a similar result at Stamford.
Domenic: [00:02:32] Yeah, it's been a really challenging 12, 24 months in particular in the construction space. And we found obviously cost escalations which you've touched on and supply constraints have resulted in builders in particular feeling the pinch, and that's obviously flowed through to developers. And I think from our perspective, and we've certainly experienced this directly with trilogy, you know, where you've got good lenders that are able to deal and understand the construction risk properly and manage that risk properly. They can deal with hiccups in the road and trilogy's definitely demonstrated that to us. Look, you can't necessarily pre-empt COVID, you can't necessarily pre-empt the rate at which interest rates have moved because it obviously has moved very aggressively in particular over the last six months. I think the better lenders like Trilogy out there are well placed to be able to respond to those challenges as when they present themselves.
Clinton: [00:03:31] Trilogy Very much so. In fact, we've always prided ourselves on our strong back of house, which of course is the unsung hero in the construction. Lending space is very easy sometimes to write a loan and introduce new business, but all of the test is at the back end. As the project is completed and the sales are made and the construction is finished and all of the numbers still stack up and all of the stakeholders get a return, strengthen their model to move on to yet more projects. A proactive management style has been the key to our success. As I said, we lean into the projects and try hard to work with them on construction delivery. I mean, in one case, for example, I think we took over a project in Marrickville, a previous bill that had failed, and there was the challenge there, for example, of taking on a partly constructed and completed construction project. But you gave us the information we needed as a starting point and we brought in the additional consultants that was required. We had a very strong and capable borrower in that regard. A great asset type one we believed in as well. Now that that funding is underway, that projects just zooming ahead and going really well. But it's not a project for all lenders. It had a higher level of complexity and we think with our back of house model and our strong skill sets and diversified approach to how we how we do lending, it probably helped that borrower.
Domenic: [00:04:57] There's a really, really good example of where Trilogy added enormous value, frankly, to not only Stamford but to the client. Ultimately, when it became apparent that that lender was wanting to not wanting to continue the funding the project, we reached out to Trilogy and the experience was exceptional actually. So it happened very quickly. You guys were able to. Mobilize your consultants and your back of house team, as you refer to it, in terms of understanding the risk, getting your heads around the risk. It was a project which had stalled for a little while as the outgoing mortgagee and the developer were working things through. But ultimately it's resulted in the appointment of a new builder, a very strong builder. You've obviously wrapped a consulting team around that project and it's well underway now and we'll complete and I've got no doubt we'll be a great outcome for not only the developer but for you guys as lenders in that in that project as well. But there's not too many lenders, I have to say in the country that we could have spoken to, given that dynamic and that scenario and the fact that we were able to not only engage with Trilogy, but engage, and the fact that you engage so quickly and responsively was a real positive outcome for the client and reflected enormously well on us. Frankly.
Clinton: [00:06:23] We did take quite a holistic view of the projects. It's not just what's on the printed page. We look at the borrowers and meet them. We like to go to site regularly. I was on that Marrickville site before we signed off on the loan and walk through with our good consultants who were helping set the project up again and set it up to succeed. And and that's, as I said, now going ahead at a great rate. So I'm really pleased to be involved in that one. I guess that's one example. Another example was out in Blacktown where we had once again a very experienced builder group. One of your very good clients, as I understand, one that we were more than more than happy to fund. And it sort of just the timing was all against it in the sense that just as they started, they had those COVID interruptions that I mentioned earlier and we had to work our way through a series of interruptions, including a harsh local government lockdown. And I would hope that borrower and you at Stamford Capital felt that we were not just fairweather sailors, that we're in there through thick and thin to to help ultimately achieve a project success. And that project now also is is going ahead at a great rate. And they've looked like they'll be finished ahead of schedule at the rate they're going, but they're certainly going very well. So I was interested in your thoughts on that, too.
Domenic: [00:07:41] And another another great example, slightly different, I guess, to the Marrickville example in that the challenges came during the construction phase as opposed to prior to you guys getting involved like the Marrickville transaction and that were driven by external factors. So COVID lockdowns, Blacktown was one of those LGAs where you couldn't travel out of you couldn't travel into. So by virtue of that, you just they just couldn't get people to site. And obviously, Sydney, unfortunately this past six months has been inundated with really poor weather. And you know, that site was a swimming pool for a number of weeks on end just given the rain that has occurred. And it did result in delays. And I think to Trilogy's credit, the the way in which trilogy responded to those delays reflects the fact that you guys have got depth of understanding around construction risk. You know, you touched on the fact that you've got a broad range of experience, quantity, surveyors, valuers, agencies, agents, etc. that can get their head around risk, can understand the fact that these external challenges result sometimes in delays on projects.
Clinton: [00:08:58] We'll be always looking at where's the airstrip and how do we bring the plane down safely know. And of course that benefits all the stakeholders. At the end of the day, even if you get rerouted to another another place to land, there's still always a safe way to land if you sensible and keep a cool head. So. So I'd like to think they were good experiences, but a lot of that, as I said earlier, it goes into how well you set them up as a commercial mortgage broker, and I think that's the skill set of a good commercial mortgage broker is you really do look deeply into the project right from the beginning, understand all of those elements, and then by the time you're presenting it to a group like Trilogy, it's so much easier for us to move quickly and effectively. Certainly in the Australian market, we're expecting a quite a robust year next year, potentially off a lower base of activity, but all of that activity will be reset to Sydney, standards of pricing and expectations and all the news that might have occurred around construction costs and valuations is largely in place now. I think the smart ones are getting back in the saddle and getting on with the job of 2023 and and the new project activity. And we're very much hoping to be a strong supporter of that and through yourself as well.
Domenic: [00:10:17] Yeah, it's definitely we're certainly seeing a telling of cost escalations, and we're obviously having continuous conversations with clients around that particular issue. I think once we get some visibility around interest rate movements in particular, I guess as they're starting to slow down, I do believe confidence will return relatively quickly. We agree with you. We think the residential apartment market in particular is significantly undersupplied. There was some press this morning about the government wanting to ensure that they continue to have migration into this country, which is been well publicized, and that's going to create a demand story in particular in the apartment sector, which we think is largely unfulfilled. And in fact, you know, there's been very little supply nationally in the apartment sector the last 2 to 3 years. So we do think 2023 is a really interesting year. Trilogy, for example, is really uniquely placed insofar as it can respond to that need for developments to continue through next year.
Clinton: [00:11:29] Look forward to doing much more business with Stamford Capital in 2023.
Domenic: [00:11:33] Same. And that consistency piece is really important. I mean, the relationship that we have with our clients is built on us being consistent as well. And so where Trilogy demonstrates that consistency, it helps us enormously as a broker in that interaction with clients. Because when we go to those clients and say, This is where Trilogy is going to do a deal at, and you guys issue us with those term sheets or indicative emails, however you're responding to us on those opportunities. We know there's consistency and not just at the front end, but on the way through the credit chain. And again, we've seen that demonstrated multiple times.
Clinton: [00:12:09] You've got a wide spread of potential offerings in terms of what you can offer to develop a client, and you've got the sophistication to be able to assess those and do those properly. That's a particular expertise that comes, I guess, after a lot of experience in market, that commercial lending is not the same as a residential mortgage, which is basically fill out a form and submit it to the top 20 banks.
Domenic: [00:12:36] I sit on the board of CAFBA, as you know, and as as part of our remit on that CAFBA, we're actively encouraging brokers to come into the commercial space. We do caution it, though, in that you need to know what you're doing and it is a particular skill set which can be learned and you can mentor, get mentored and and align themselves with other groups that give you that insight and enabling you to a better understand a product and better understand a particular client's needs. You know, we as a broker, where we're a solution provider, we're not a product seller. And so if you can't understand what it is that a client needs, then you can't find the solution that they need for that particular set of circumstance. And so advocate very strongly for new entrants to the market. But you must be educated. You must take the time to learn the products. Speak with Trilogy, for example, and making sure that you understand where Trilogy's Appetite is. And and I'm sure you guys can do a lot of work with those potential new entrants as they're coming into market in terms of that education education piece.
Clinton: [00:13:45] And far from being faceless, nameless lenders, we do offer that very personalized service. We call our main operatives, portfolio managers, and we've got portfolio managers based in all three capital cities Melbourne, Sydney, Brisbane, they're all readily available. You'll find them on LinkedIn and on our website and any one of them will be pleased to offer those discussions in the first instance. So that's probably a good place to wrap it. It's been good fun catching up. I do wish you all the best for the immediate future and thanks so much for your time.
Domenic: [00:14:18] Thanks, Clinton. Great to be here. Yeah.